How to Calculate Depreciation For My Rental Property | Taxes

Rental depreciation is the building’s cost basis spread over 27.5 years, with year one prorated under the mid-month rule.

Depreciation is one of the few rental deductions that doesn’t require you to pay anything new this year. It’s the tax system’s way of letting you recover what you spent on the parts of the property that wear out over time.

The math is simple once your inputs are right. Most mistakes come from the setup: starting depreciation too early, mixing land into the building, or leaving out costs that belong in basis. This walkthrough keeps you on the IRS track from the first number to the final deduction.

What Depreciation Means For A Rental

For federal tax purposes, depreciation is a cost recovery deduction for property used to produce income. Residential rental buildings are generally recovered over 27.5 years using straight-line depreciation under MACRS. Straight-line means the deduction is spread evenly, then adjusted for partial years. IRS Publication 527 (Residential Rental Property) is the core IRS reference for rental real estate rules and terms.

Depreciation is tied to basis. If your basis is off, your annual deduction is off, and your gain or loss on sale can be off too. So the goal is not fancy math. It’s clean inputs and clear records.

Before You Start: The Four Numbers You Need

Write these down before you open a spreadsheet. It keeps the process tidy and makes your file easy to follow later.

• Placed-in-service date: the date the unit was ready and available for rent, not the closing date.
• Total cost basis: what you paid, plus purchase costs that must be added to basis.
• Land value: the part of the total value assigned to land. Land is not depreciable.
• Building basis: total cost basis minus land value, plus later capital improvements.

How To Calculate Depreciation For My Rental Property Step By Step

Step 1: Confirm The Property Class

Most long-term rentals are “residential rental property” for depreciation when they are dwelling units and meet the IRS definition. That category uses a 27.5-year recovery period. Nonresidential real property uses a different period, so classification comes first.

Step 2: Build Your Cost Basis

Cost basis is more than the contract price. It’s the all-in cost to acquire the property. Many landlords start with:

• Purchase price paid in cash and debt
• Title fees and recording fees
• Legal fees tied to the purchase
• Transfer taxes

Some closing costs are handled under other rules, so don’t dump every line item into basis. Keep your closing statement and mark what you treated as basis so you can explain the math later without guesswork.

Step 3: Split Land From The Building

You can depreciate the building, not the land. Use a defensible allocation method and keep proof. Many people use assessed values that separate land and improvements, or an appraisal that gives both figures. Consistency and documentation beat perfection.

Step 4: Calculate Depreciable Building Basis

Start with your total cost basis, subtract land, then add capital improvements placed in service later. Improvements are upgrades that add value, extend useful life, or adapt the property to a new use. Routine repairs are tracked separately.

Step 5: Compute The Full-Year Amount

For the building, the full-year figure is:

• Full-year building depreciation = Building depreciable basis ÷ 27.5

Step 6: Prorate Year One With The Mid-Month Rule

Residential rental buildings use the mid-month convention. Your first-year deduction is based on the number of months the building is treated as in service that year, counted from the midpoint of the placed-in-service month. A property placed in service in April is treated as in service for 8.5 months in the first year. The final year picks up the remaining fraction to complete the full 27.5 years.

If you want the reporting logic that matches tax software inputs, the Instructions for Form 4562 show how depreciation is entered and carried through the return.

Worked Example With Real Numbers

Here’s a clean example you can mirror with your own numbers.

• Placed in service: April 2
• Purchase price: $360,000
• Acquisition costs added to basis: $9,000
• Total cost basis: $369,000
• Land allocation: 20%

1) Building basis. Land value is $369,000 × 20% = $73,800. Building depreciable basis is $369,000 − $73,800 = $295,200.

2) Full-year depreciation. $295,200 ÷ 27.5 = $10,734.55.

3) First-year depreciation. Placed in service in April, count 8.5 months in year one. $10,734.55 × (8.5 ÷ 12) = $7,604.89.

Table: Inputs That Change Your Depreciation Schedule

Keep this table with your tax file. Each line is an input that changes the number on your return.

Input	What Counts	Where You Track It
Placed-in-service date	Date the unit was ready and available for rent	Listing record, lease start, maintenance log
Purchase price	Contract price plus assumed debt when it applies	Closing statement, purchase contract
Acquisition costs added to basis	Title, recording, legal, transfer taxes, related fees	Closing statement with marked line items
Land allocation method	Assessed split, appraisal, or documented ratio	Assessor page, appraisal, worksheet
Improvements placed in service later	Capital upgrades placed in service after purchase	Invoices, permits, dated photos
Business-use changes	Conversions from personal use to rental, or back	Calendar log, ads, lease history
Method elections	MACRS vs. ADS elections when they apply	Return copy and election statement
Dispositions	Sale, retirement, casualty, or partial disposition	Settlement statement, insurance records

Calculating Rental Property Depreciation Under MACRS Rules

Once the building schedule is set, treat other rental assets as their own line items. Appliances, carpet, and furniture are not 27.5-year property. They often fall into shorter recovery periods under MACRS. That’s one reason a landlord’s depreciation schedule can have many rows.

For the official definitions of methods, recovery periods, and conventions, use IRS Publication 946. It’s also where you’ll see how special rules interact with MACRS when they apply.

Improvements Vs. Repairs

A repair keeps the property in ordinary operating condition, like patching drywall or fixing a leak. An improvement changes the property in a lasting way, like replacing a roof or remodeling a kitchen. Improvements are generally depreciated as separate assets with their own placed-in-service month.

Placed In Service Isn’t The Closing Date

Starting depreciation on the purchase date feels natural, but the IRS standard is when the property is ready and available for rent. If you spent months renovating after closing, your placed-in-service month is later than the closing month. Keep a short note in your folder that shows when the unit became rent-ready and what work happened before that date.

Table: Common Rental Assets And Typical Recovery Periods

Use this as a sorting tool when you build your asset list. Then confirm the class in the IRS material when you enter items in your schedule.

Asset	Recovery Period	Method And Convention
Residential rental building	27.5 years	Straight-line, mid-month
Nonresidential real property	39 years	Straight-line, mid-month
Land	Not depreciable	Tracked in basis only
Appliances	Often 5 years	MACRS, half-year in many cases
Carpet and movable flooring	Often 5 years	MACRS, half-year in many cases
Furniture	Often 5 or 7 years	MACRS, half-year in many cases
Land improvements (fences, drives)	Often 15 years	MACRS, convention varies

Where Depreciation Gets Reported

Many landlords report rental income and expenses on Schedule E, with depreciation commonly claimed through Form 4562 and carried to the rental schedule. Keep a depreciation schedule in your records even if software prints one. You want a year-by-year trail that shows basis, method, recovery period, and accumulated depreciation.

To understand what counts as basis in plain IRS terms before you build your first schedule, read IRS Topic 703. It explains basis, then points you to related IRS material that digs deeper.

Common Errors That Cost Money

Depreciating Land

If land is mixed into the building basis, the deduction is overstated and the schedule won’t match IRS logic. Set the split once, document it, then stick with it unless new facts change the allocation.

Lumping Later Improvements Into The Original Asset

A roof placed in service years after purchase is not part of the original placed-in-service month. Track it as a new asset so your proration and remaining basis stay clean.

Ignoring The First-Year Proration

The mid-month convention makes year one a partial year in most cases. If your software asks for the placed-in-service month, use the month the unit became rent-ready.

A Simple File Setup You Can Reuse Each Year

• Closing statement with basis items marked
• Land/building allocation proof
• One sheet that lists each asset, placed-in-service month, cost, and recovery period
• Improvement invoices stored by year, with the placed-in-service month written on page one

That’s enough to rebuild your schedule, answer questions, and keep the numbers consistent from year to year.